Rising oil prices often are the death knell for economic recovery. This time around the surge in crude oil is looking more like a harbinger of better days.

Political tensions over Iran's nuclear ambitions have pushed crude oil prices up 11 percent over the past month to around $123 a barrel, stoking concerns a violent confrontation that reduced supplies could send Brent crude above $150 a barrel.

Oil at that level could undermine a gradual strengthening of the world economy. Even at current levels, it could shave 0.2 percentage point from growth, analysts said.

Just as Europe's sovereign debt problems have started to ease, oil has emerged as a new headwind.

But the Iran-driven spike masks a broader underlying trend, and as long as military strikes are avoided, it appears to pose only a limited risk. In other words, there is a good news story.

Crude oil prices have been climbing in fits and starts since early October in line with slowly improving economic data, especially in the United States.

Equity prices have risen in lockstep with oil's advance. When the two rise together, it usually indicates a broad-based economic expansion. The Standard and Poor's 500 index is up 17 percent since the beginning of October, and MSCI's global equity index has recouped all its losses since the U.S. debt debacle last summer.

This suggests that roughly half of the 25 percent gain in the price of Brent crude since early October reflects a strengthening of global demand, economists said. The world's factories are churning out goods at a faster pace, a key indication of the economy's strength, meaning it is in better shape to handle a supply shock from Iran than a year ago.

"We think that crude oil prices have risen more because of improving sentiment regarding global growth than because of geopolitical risk concerns," Deutsche Bank told clients.

WAGES CUSHION THE BLOW

A sterner test will be whether consumers can absorb the higher costs at the gasoline pump, since their spending accounts for about two-thirds of all economic activity in developed economies. And that will depend upon wage gains.

So far, the news here is reasonably encouraging too. American wages and salaries have risen at a 5.7 percent annual rate in the seven months through January. Average hourly earnings, to be reported on Friday as part of the government's monthly jobs report, are expected to have advanced by 0.2 percent in February from the prior month.

U.S. gasoline costs have accelerated at an even faster pace. They are up by 10 percent from their lows late last year and in California have topped the psychologically important $4 a gallon level. But so far the hit to the American wallet has been less severe than during the Arab spring a year ago.

A warm winter and a 30 percent plunge over the past three months in prices for natural gas, the fuel used to heat most American homes, have cut the average household energy bill. And more people have jobs today, providing more of a cushion to absorb costlier gasoline.

Source :economictimes.indiatimes.com